Alphabet Shares Are Down But Not Out

Growth stocks got rocked this month, but the mega-caps like Alphabet (NASDAQ:GOOGL, GOOG) stock have weathered the storm relatively well. The strength of their balance sheets and more predictable cash flows are keeping shareholders in their seats.

Earnings reports: Google (GOOG, GOOGL) headquarters in Mountain View, California.
Source: achinthamb / Shutterstock.com

In light of the Invesco QQQ Trust (NASDAQ:QQQ) and GOOG stock slipping below the 50-day moving average, I want to take a fresh look at the price charts.

Allow me to begin with the conclusion. The momentum of Alphabet’s trend is waning, making cash-flow plays more attractive than directional ones.

As one of the top six holdings of the Nasdaq exchange-traded fund, GOOG stock exhibits a high correlation to QQQ. That makes it challenging for Google to rise while the Nasdaq is sinking. It’s like trying to jump with an anvil around your ankle. Possible? Yes. Probable? No.

The Nasty Nasdaq

Nasdaq-100 ETF (QQQ) with trend neutrality
Source: The thinkorswim® platform from TD Ameritrade

The past month has hosted quite the reversal of fortune for the tech-heavy Nasdaq. It entered Thanksgiving week hot as a freshly fired pistol. But rather than gift investors with a leisurely rise into year-end, bears attacked.

A nasty bearish engulfing candle kicked off the madness on November 22nd. Distribution days ballooned, and support levels gave way. All rallies have been swiftly rejected, and we’ve even carved out a few lower pivot lows. The 20-day moving average rolled over, and prices are now below the 50-day.

At Monday’s lows, QQQ was 7.6% off its peak. While this lengthy list of deterioration doesn’t mean tech giants like Alphabet are destined for lower prices, it does mean the path of least resistance is no longer up. So maybe we chop around for a while and then eventually work back through overhead resistance and turn the short-term trend back up.

With the index’s muddled posture now framed, let’s take a look at how GOOG stock is faring.

GOOG Stock Chart

Alphabet (GOOG) stock chart showing its uptrend turning sideways.
Source: The thinkorswim® platform from TD Ameritrade

Given how sympathetic Alphabet is to the rest of the tech sector, its price chart has largely mirrored QQQ. So consider the description above of Nasdaq’s crumbling equally applicable to GOOG.

One bright note is this week’s response to Monday’s down gap. Recall stock futures sold off heavily over the weekend on persistent omicron fears and the Federal Reserve’s more hawkish tone. But rather than abandon ship at the cash open Monday morning, buyers swooped in and jammed GOOG to the high of the day at the closing bell. At the time of this writing, prices are continuing higher on Tuesday, gaining nearly another 1%.

Because of the bounce, prices carved out an equal pivot low at the old support level of $2,815. That helps the trend strike a more neutral tone despite the recent drop below the 50-day moving average.

To summarize, I’m optimistic enough to deploy neutral to slightly bullish-leaning cash flow trades. But not to play aggressively bullish.

Cash Flow with Credit Spreads

Cash flow trades profit from time decay more than direction. As such, they involve selling options over buying them. Alphabet’s sky-high price tag takes naked puts off the table. Instead, I suggest using bull put spreads.

The Trade: Sell the January $2,690/$2,680 bull put spread for $1.15 credit.

Consider it a bet that GOOG stock will be above $2,690 at expiration. If it is, you will capture the entire credit of $1.15. The max loss is $8.85 and will be forfeited if prices fall below $2,680 by expiration. To minimize the damage, I suggest exiting if we break $2,690.

On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article. . The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

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